Frontier, Emerging Markets

One of the most profitable opportunities out there in my eyes right now is an investment in frontier or emerging markets.  Frontier markets are economies that have yet to develop into what are known as emerging markets.  Once they become emerging markets, their next step is to join the U.S. as a developed market.  You can probably deduce by now that the frontier market is riskier than the emerging market and so on.  As with any investment, these risks require greater return. But, I believe there is return in excess of the compensation for the risk borne. 

I believe that investors are still sleeping on these opportunities out of naivety and fear.  The International Monetary Fund expects emerging and frontier markets to grow at nearly 3 times the average rate of developed markets.  Goldman Sachs strategists predict that emerging market total market capitalization will skyrocket from $14 trillion to $80 trillion in the next 20 years.  They have outstanding consumer growth led by rapidly expanding middle and lower-middle classes.  Some argue that these higher growth rates combined with healthier demographics provide a safer investment than in developed economies.  What did we keep hearing about during the recession?  How this company and that company were cutting costs, becoming leaner, more efficient.  Did that not happen in less developed economies also?  I think it probably happened to a larger extent because they were more strapped for cash.  Now with more growth and even leaner companies, it sounds like a recipe for a risk-adjusted excess return on your investment.  

There are a number of fundamental risks with frontier and emerging market investments.  Inherent in every investment is economic risk, which is more exaggerated in less developed economies. You need to also be aware of sovereign and liquidity risk with these markets.  However, the nature of ETFs enables you to shed much of the liquidity risk through a higher volume of trading and the sovereign risk with diversification.  Here are some ETFs that track frontier markets: FRN, MES, AFK, PMNA.  And emerging markets: EEM, VWO.  Take a look at those and see which markets and sectors you want to get exposure to.  

Enjoy and always *preserve your capital*!